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Employee Layoffs at St.

Mary’s Hospital

St. Mary’s Hospital is a medium-sized, 400-bed hospital in a


northwestern city. It was established in 1908 by the Sisters of the
Sacred Heart, an order of Catholic sisters. The facility has grown
gradually over the years and is now the third largest hospital in the
city. It is entirely non-union and has never experienced an employee
layoff since it inception.
Sister Mary Josephine has been the Chief Executive Officer at the
hospital for eleven years. Eight years ago she hired Ms. Sharon
Osgood as Director of Personnel. Ms. Osgood has an MA in Human
Resource Management and has been instrumental in formalizing the
institution’s human resources’ policies and procedures.
Occupancy rates in the hospital had run between 76 and 82%
form 1970 to 1982. However, since then occupancy has fallen to 57%.
Such declines have not been unusual for this industry during this time
period as a result of changing reimbursement policies, emphasis on
outpatient services, and increasing competition. However, the
declining occupancy rate has affected this hospital’s revenues to such
an extent that it ran a deficit for the first time last year. The only
response to these changes thus far has been a tightening of
requirements for equipment or supply purchases.
At the most recent quarterly meeting of the Board of Directors,
Sister Mary Josephine presented the rather bleak financial picture.
The projected deficit for the coming year was $3,865,000.00 unless
some additional revenue sources were identified or some additional
savings were found. The Board’s recommendation, based on the
immediate crisis and the need to generate short-term savings, was
that employee lay-offs were the only realistic alternative. They
recommended that Sister Mary Josephine consider laying off up to
10% of the hospital’s employees with an emphasis on those in
“nonessential” areas.
Sister Mary Josephine responded that the hospital’s employees
had never been laid off in the history of the institution. Moreover, she
viewed the employees as part of the “family” and would have great
difficulty in implementing such layoff. Nevertheless, since she had no
realistic short-term for closing the “revenue gap,” she reluctantly
agreed to implement a layoff policy which would be as fair as possible
to all employees, with a guarantee of reemployment for those laid off,
and to find additional revenue resources so that layoffs would be
unnecessary in the future.
Sister Mary Josephine called Sharon Osgood into her office the
next morning, shared her concerns, and asked to prepare both a short
term plan to save $3 million over the next year through employee
layoffs as well as a long term plan to avoid layoffs in the future. Her
concerns were that the layoffs themselves might be costly in terms of
lost investment in some of the laid off employees, lost efficiency,
potential lawsuits, and lower morale. She was concerned that the
criteria for the layoffs not only be equitable, but also appear to be
equitable to the employees. She also wanted to make sure that those
being laid off received “adequate” notice so they could make
alternative plans or so that the hospital could assist them in finding
alternative employment. Since the hospital had no previous
experience with employee layoffs and no union contract constraints,
her feeling was that both seniority and job performance should be
considered in determining who would be laid off.
Sharon knew the hospital’s performance appraisal system was
inadequate and needed to be revamped. While this task was high on
her “to do” list, she also knew she had to move ahead with her
recommendations on layoffs immediately. The present performance
appraisal system uses a traditional checklist rating scale with a
summary rating. Since there is no forced distribution, the average
ratings of employees in different departments vary widely.
Exhibit 2.1 shows the summary ratings of employees in each
department. Most supervisors in all departments rate most of their
subordinates either “satisfactory “ or outstanding.” Sharon has done a
quick review of those employees whose overall ratings were
“unsatisfactory” or “questionable.” Most are employees with less
than 3 years seniority, whereas the “satisfactory” employee has
worked for St. Mary’s approximately 7 years. Sharon is preparing to
submit her recommendations to Sister Mary Josephine and has come
to you for advice. Exhibit 2.2 provides a summary of the distribution
of employees and payroll expense by department for the most recent
year.

EXHIBIT 2.1 Percentage Distribution of Performance Appraisal


Summary Ratings by Department at St. Mary’s Hospital
Unsatisfactory: Questionable: Satisfactory:
Outstanding:
Needs to Improve Needs Some Meets
Normal Substantially
Department Substantially Improvement Expectations
Exceeds Norms

Nursing 6.4 54.2


33.0

Allied Health 5.7 6.2 47.8


40.3

Central Administration 2.7 3.1 67.5


26.7

Dietetics/Nutrition 2.1 6.2 68.3


23.4

Housekeeping/
Maintenance 7.8 12.4 54.6
25.2

Medical Staff 1.1 6.2


63.8 28.9

EXHIBIT 2.2 The Distribution of Employment and


Payroll Expenditures at St. Mary’s Hospital

Annual
Number of
Turnover
Department Employees Payroll ($)
Rates (%)
Nursing 602 $15,050,000 12.2

Allied Health Departments 261 5,472,000 8.7

Central Administration 154 6,160,000 3.5

Dietetics/Nutrition 65 1,430,000 7.3

Housekeeping & Maintenance 36 540,000 8.4

Medical Staff 32 1,680,000 2.1

TOTAL 1,150 $30,602,000 9.5*

*Represents weighted average turnover for all employees.

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